Barron?s Makes The Case For Active ManagementLearn more about this firm
By: Roger Nusbaum, AdvisorShares ETF Strategist
The Barron’s cover story made the case for active management outperforming passive indexing when interest rates rise citing the history that supports the notion from past periods of rising rates with the underlying logic being that “rising rates go hand-in-hand with outperformance of smaller stocks, which active managers tend to favor” as well as part of active management including what to avoid which is a concept we have discussed here many times before.
Obviously I believe in active management which can include using passive funds in an active manner. This can apply to sector funds or narrower fund targeting some niche or industry.
There are a couple of points I would add to the Barron’s discussion, the first of which being that no strategy can be the best for all times. Where the context is active or passive, one must outperform the other and lately that has of course been passive. And as passive has led for the last few years investors are giving up on active in some sort of recency effect.
If Barron’s turns out to be correct about rising rates being a better back drop for active then that is likely to last for a while once interest rates do start to move. If that turns out to be the case then the recency effect will swing the other way, investors will give up passive which will be just as silly as giving up on active now.
A few days ago I bought a semiconductor ETF. A few weeks earlier I sold a semiconductor stock because it was making a change to its balance sheet structure and so replacing it, albeit with a few week gap, with the ETF is an example of using a passive product in an active strategy.
This feeds into the second point which is that picking one over the other (active or passive) for constructing the entire portfolio is not the correct way to frame the conversation. A portfolio with a core of a couple/a few index funds combined a couple/a few individual stocks that bring some attribute beyond index, like a higher dividend yield maybe, is reasonable and probably fairly common. So then are other active/passive combos reasonable and fairly common.
Investing should not be about absolutes or defending some sort of shield it is about navigating to some future outcome in a manner that provides a reasonable chance for success when combined with an adequate savings rate and that also prevents the investor from regularly panic selling their holdings.